tax expenditures

I'll say right up front that I am not an unbiased observer of this particular effort by OECD to tabulate support measures to fossil fuels.  I've collaborated with Ron Steenblik, one of the project supervisors, for decades at this point; and with project manager Jehan Sauvage since his early days of deciding to enter the bizzarre-but-fascinating world of energy subsidies.  I also contributed directly to the 2013 version of the Inventory. (Access the report and associated data via this link).

Since I started working on subsidy issues more than 25 years ago, a key goal was always to take this whole area of perniciously invisible support -- distortions that were surreptitiously undermining our economies and our environment -- and to force it into the fore where it would become an unavoidable part of policy discussions and make the subsidies much harder to defend.  I clearly think what OECD is doing here is very important.

OECD 2015 coverBut it is because of this long involvement that I can see the many ways in which the current work moves the ball on subsidy transparency and reform. Here are some of them:

  • Capturing the policy-level details for more supports; filling in pieces missing from price gap.  Measuring the gap between market prices and domestic prices for fossil fuels (the "price gap" approach used in subsidy estimates by IEA and the World Bank) is by no means easy, and in many countries is still the only way to assess government support.  But the metric does not capture everything.  Further, the reform of subsidies is, at its root, a political rather than an economic battle.  The politics lie not with national aggregate figures but with individual tax rules and grant programs.  It is these policy details that set the fault lines that drive or block reform.  Although tracking these supports is time consuming and often quite challenging, if you want to see the points of distortion, prioritize the worst ones, and have a focal point around which others can organize politically for reform, you need the line-item detail. 
  • Expanding the countries evaluated beyond the OECD member states.  The challenges OECD faced in getting the first fossil fuel subsidy inventory off the ground were very big.  I am gratified to see this newest update cement the OECD data collection effort as an important and integral part of the move towards transparency in fossil fuel subsidy reporting around the world.  Of particular note is that this edition expanded beyond OECD member countries, with the important addtion of Brazil, Russia, India, and China. 
  • Inclusion of both national and sub-national supports.  It is increasingly recognized that the market distortions and environmental damage from particular fossil fuel activities may not be visible by looking at any particular support in isolation.  Rather, the combination of support policies flowing to a single economic actor or activity (often referred to as "subsidy stacking") needs to be evaluated as a group.  In addition to a growing range of supports captured, the OECD Inventory continues to be one of the few resources to include state and provincial subsidies rather than just national policies.   
  • Free access to detailed subsidy data, under the oversight of OECD.Stat.  The 2015 Inventory brings with it a big expansion in data access.  The information is now housed at the OECD Statistics group, and will benefit from their strong reputation and ability to manage the information over time.  The data sets include granular policy-level estimates, and OECD's decision to make the information available at no charge on the internet will greatly leverage the ability of other researchers to build on OECD's work. 
  • Build-out of time series.  Each iteration of the Inventory brings in additional years of coverage, providing a much clearer picture of policy change over time.  Rather than publish just the most recent data, OECD is presenting the full historical time series.  

Two years from now, in 2017, the next update will arrive.  As with the 2015 Inventory, my hope is that the next one will also include a number of important innovations.  The area I would particularly like to see is an expansion of the types of support systematically reviewed and captured.  Right now, the Inventory primarily captures tax expenditures and direct government support.  For the next update, my hope is that government subsidies via credit markets, indemnification, and preferential market rules (e.g., dispatch order that puts coal plants first) would also be captured; and that the coverage of all policy types at the sub-national level continues to expand.

If a company or an industry is going to get subsidized, there are good ways and there are better ways for it to happen if one is sitting in the corporate suite.  Among the best is to receive big subsidies that, while not flowing to your competitors, arrive in a form that nobody seems to notice.  The benefits of this structure are clear:  while the recipient gets a large slug of financial support, because few people see or understand the largesse, the political cost to both obtain and retain the subsidy is relatively low.  Master Limited Partnerships, the subject of Earth Track's most recent report Too Big to Ignore: Subsidies to Fossil Fuel Master Limited Partnerships, prepared for Oil Change International, fit the bill here perfectly:

MLP subsidies_cover

  • They are big.  Not only can beneficiary companies with hundreds of billions of dollars in market cap entirely escape corporate income taxes on profits earned from eligible activities, but they can also defer for many years any tax payments on the gobs of cash they distribute out to their owners.   
  • They are mostly hidden.  Energy subsidy studies documenting tax breaks conducted in recent years by the US Department of Energy, the Congressional Budget Office, the US Treasury, and the Government Accountability Office have either not mentioned MLP subsidies at all, or done so only in passing with no related numerical estimate.  The Congressional Research Service did mention the tax break, but did not link it to energy.  Only the Joint Committee on Taxation (JCT) both linked the tax break to energy and included an estimated revenue loss figure.  Unfortunately, JCT's first estimates came only in 2008, though fossil fuel MLPs were already surging in earlier years.        
  • They are selective.  Because most industries can't partake in this little game, the tax exemption for MLPs generates an especially big market boost to oil and gas over other energy options.  Nearly every other industry lost their ability to form tax-favored publicly-traded partnerships like MLPs in 1987, more than a quarter-century ago.  The reason?  Congress was afraid corporate income tax revenues would be gutted.  Since that time, fossil fuels have increasingly dominated this tax break, comprising well more than 75% of the sector by 2012. 
  • They have (until this point) little political risk.  Fossil fuel MLPs continue to grow very quickly, and, unlike common and highly visible subsidies to wind and solar, MLP tax breaks never expire.

Selective Subsidies That Work Counter to National Fiscal and Environmental Goals

  • MLP tax expenditures are part of a broader set of government subsidies that continue to underwrite activities contributing to climate change. These policies not only have large fiscal costs, but also work counter to the country's environmental goals and our national interest.
  • Fossil fuel MLPs are growing quickly. The market capitalization of fossil fuel MLPs reached an estimated $385 billion by the end of March 2013, up from less than $14 billion in 2000. Related tax subsidies have been as high as $4 billion annually in recent years at the federal level alone.  Because the tax benefits from MLPs also ripple through state income tax codes, the combined state and federal MLP subsidies would be even higher.  
  • Fossil fuel activities continue to dominate MLPs, both in number of firms and share of total market capitalization. As of the end of last year, 77 percent of MLPs were in the oil, gas, and coal sectors based on data collected by the National Association of Publicly Traded Partnerships (NAPTP), the main industry trade association. Firms in the fossil fuel sectors comprised 79 percent of total MLP market capitalization, though this figure is likely a bit low. Firms classified in other sectors also include some oil and gas-related businesses, including fracking sand and fossil fuel investments held by publicly-traded private equity firms such as Blackstone.

MLP Subsidies to Fossil Fuels:  Underestimated and Ignored for Too Long

  • Government estimates of tax expenditures from energy-related MLPs are too low. Tax expenditures related to MLPs have been understated in recent years, and appear to be growing rapidly. Using a variety of estimation approaches, we estimate that tax preferences for fossil fuel MLPs cost the Treasury as much as $13 billion over the 2009-12 period, more than six times the official estimates.  
  • MLP tax breaks are among the largest subsidies to fossil fuels. Although most government reviews of energy subsidies have not even included MLP-related tax expenditures, our estimates suggest this subsidy is among the top five largest fiscal subsidies to the fossil fuel sector and the largest single tax break to the sector.
  • Growing share of production cycle for oil, gas, and coal can be organized as a tax-favored MLP - indicative that revenue losses will continue to grow. Financial innovation and IRS private letter rulings have expanded the fossil fuel market segments able to legally and successfully operate as tax-favored MLPs. Recent innovations have even established a precedent by which MLPs have successfully acquired taxable corporations, taking them off the corporate tax role in the process.

MLPs for All?  Providing Matching Tax Breaks to Renewables May Not be a Panacea

Though supported by many environmental groups, recent legislation introduced to expand MLP-eligibility to a range of new energy technologies may not be the panacea it is widely believed to be by supporters.  Further, the legislation is currently worded to include a range of energy technologies such as waste-to-energy, landfill gas, coal-to-liquids, and biomass that have a decidedly mixed environmental profile.

  • Even in well-established market segments, there is a large overhang of fossil fuel assets poised to exit the corporate income tax system through conversion to MLPs. Less than 20 percent of total assets in the refiners, exploration and production, oil services, and coal sectors are presently held in a tax-favored MLP format (see Table). Even in the MLP-intensive midstream segment of the oil and gas market, conventional (taxable) corporate forms continue to own more than half of the assets. In all of these sectors, there is a huge pool of assets that multiple investment firms anticipate will convert to MLPs in coming years.
  • Proposed expansion of MLP eligibility to renewables risks disproportionate benefits flowing instead to the fossil fuel sector. Current efforts to expand MLP treatment to renewables (The Master Limited Partnerships Parity Act) may entrench existing subsidy recipients.  The expansion will reduce the likelihood that MLP's tax-exempt treatment will be ended for fossil fuel producers, allowing the rapid growth of tax-exempt fossil fuel MLPs to continue unchecked. This legislation also would open MLP-eligibility to power generation for the first time, creating risks that this treatment will be extended from the current proposed set of recipients (biomass, solar, wind, geothermal) to all forms of power generation in coming years. This would disadvantage energy conservation, offset hoped for gains from the expansion in renewable sectors, and trigger very large tax losses to Treasury.

MLP Subsidy Termination a More Logical Path than Further Expansion

The MLP loophole should be closed; MLPs should be taxed as conventional corporations, not extended to new uses. This strategy, continuing what the United States started in 1986, would eliminate large and growing subsidies to fossil fuels.  Canada also successfully ended tax-favored treatment of an equivalent corporate structure in 2006.  In both cases, the affected industries did not wither and die; they adapted and moved on.  This newest crop of tax-favored fossil fuel firms will do the same.

A Review of Fossil Fuel Subsidies in Colorado, Kentucky, Louisiana, Oklahoma, and Wyoming

Although data on fossil fuel subsidies around the world have been growing, most of this information focuses on national level policies.  The thousands of subsidies at the state, provincial or local levels are largely untracked -- with little visibility either in the United States or in most other countries of the world. 

Earth Track is pleased to release A Review of Fossil Fuel Subsidies in Colorado, Kentucky, Louisiana, Oklahoma, and Wyoming.  The report documents hundreds of subsidies to established fossil fuel industries and fossil fuel consumers in five U.S. states.  Many of these policies have contributed to environmental damage, energy market distortions, and fiscal shortfalls.

Political power drives state subsidies to fossil fuels

The United States news cycle as of late has been focused on the pending "fiscal cliff," a combination of automatic spending cuts and tax increases that put at risk the country's emergence from recession.  In an effort to flag ways to safely cut the US' burgeoning deficit, an unwieldy array of special tax breaks, often the result of political deals over many decades, have finally gotten some attention. 

state subsidies report coverYet the very same political drivers that have led to subsidizing powerful industries at the federal level have flourished at the state level as well.  And in many states, among the most powerful industries are those involved with coal, oil, and natural gas.

These subsidies have come through the operation of the state tax code to be sure, but also through every other available mechanism of government market intervention -- a list that includes subsidized credit and insurance, infrastructure provision, unfunded oversight, direct grants, and below-market resource sales.   And, just as these other types of support have received insufficient attention in federal fiscal cliff discussions, they are too often ignored at the state level as well.

This report is a first pass at inventorying the subsidies.  We have no illusion that we have captured everything.  But we hope that others will continue to build on this inventory so that the full scale of state-level support for the fossil fuel sector will gradually become visible.

Even based on the subset of policies we have captured, it is clear that these programs have contributed to the fiscal turmoil in which so many state governments now find themselves, and to significant environmental degradation as well.


Filling in subsidy data gaps at the sub-national level

Although data on fossil fuel subsidies around the world have been growing, most of this information focuses on national level policies.  The thousands of subsidies at the state, provincial or local levels are largely untracked -- with little systematic documentation either in the United States or in most other countries of the world. 

These gaps are unfortunate:  in the aggregate, sub-national subsidies transfer billions of dollars per year to fossil fuel industries just like their federal counter-parts.  They are additive to federal supports, further distorting the economics of specific projects and investment incentives across energy options.  This review also illustrates that not only are subsidies purposefully targeted to oil, gas or coal large, but that the fossil energy sector captures a significant share of more general state incentive programs as well.    

There is a great deal of money at play.  The Tax Exemption Budget for the US state of Louisiana, for example, contains a dizzying array of exemptions, exclusions and reductions that, all told, manage to forego three quarters of the state's corporate income tax revenue, more than half of its sales tax revenue, and nearly one-third of its severance tax revenue.  Severance tax breaks in Louisiana were worth more than $350 million in 2010, nearly all benefiting the fossil fuel sector.  Colorado has so many exemptions and offsets to severance taxes that only five of the more than 30 oil-producing counties in the state paid any net severance taxes on oil and natural gas, according to past reviews. 

In Kentucky, public spending on coal haul roads comprised one of the state's largest subsidies to the coal sector in years past.  Yet, the spending is poorly documented, a common situation with spending on energy-related infrastructure across the states evaluated. 

Fossil fuel exemptions from state sales and motor fuel taxes are also frequent, and result in significant revenue losses to state Treasuries.  Yet, in many of these situations, blanket exemptions don't make sense and should be narrowed or eliminated.


Reducing market distortions:  high value targets for state fossil fuel subsidy reform

The patterns in fossil fuel subsidies across states offered a number of high value areas for reform.  Some of these are highlighted below:

1)  There is no excuse for not tracking your subsidies.  There are only a handful of states in the entire country that have no formal tax expenditure budget at all, but two of them (Colorado and Wyoming) were in our sample.  None of the states evaluated had centralized public reporting of the many different programs to provide credit subsidies to private activities and businesses.  Further, clear and consistent reporting on energy-related oversight and maintenance by governmental agencies and how it is funded was also largely missing.  In all of these areas, small improvements in reporting would pay large dividends to taxpayers.

2)  Don't ignore "general" subsidies when looking at subsidies to fossil fuels.  Subsidies flow to power.  Not always, not completely.  But often and mostly.  Fossil fuel industries are powerful, and they tap into any source of subsidy they can.  The review of subsidies to oil and gas in Louisiana illustrates this quite point well, with substantial portions of some of the "general" subsidies flowing to fossil fuel beneficiaries.

Subsidies flow to power.  Not always, not completely.  But often and mostly.

3)  Energy is a product, and should not be exempt from general state and local sales and use taxes.  This common exemption costs state Treasuries hundreds of millions of dollars per year, but is difficult to justify for most recipients.  Concerns about energy poverty are real, since energy is a life-sustaining good.  However, ensuring the poor have reasonable access to energy services is already a central part of utility regulation across the country and thus can be separated from the issue of energy taxation.  Lifeline rates, energy assistance programs, or other similar tools are well established to ensure the poor stay warm in cold climes and cool in warm ones.   Particularly given the negative externalities associated with most fuel use, there is no justification for blanket tax exemptions for fuel.

4)  Paying for the roads.  Resource-intensive states do a poor job tracking extra construction and maintenance costs triggered by the heavier vehicles and more frequent traffic that routinely accompanies fossil fuel extractive activities.  This data needs to improve, with costs pushed back onto the industries that trigger the costs rather than buried in state or local government road budgets. 

Similarly, most states use motor fuel excise taxes to pay for transport-infrastructure (primarily roads).  Yet, exemptions for many user classes that do use the roads (e.g., government vehicles) are common.  In other cases, the states exempt forms of transport such as rail, boats, or aviation from fuel taxes entirely because they do not use roads.  But where governments are also spending money on rail, water, or air infrastructure or oversight, different earmarking might be prudent, but full tax exclusion is not.  These types of cross-subsidies are fiscally and environmentally damaging.

5)  Subsidizing favored extraction activities needs a rethink.  States routinely subsidize forms of energy they produce domestically or that come from lower productivity mines or wells.  Some of these subsidies provide incentives to boost production or consumption of higher polluting fuels such as lignite or high sulpher coal. The policies are focused on protecting employment and extraction levels.  They implicitly downplay the impact of the subsidies on environmental quality or on the ability of other fuels or energy services to compete.   Tax exemptions for fossil fuels consumed or lost during the extraction process are also common. 

In all of these situations, a rethink is needed.  Fossil fuels in lower productivity wells are one type of marginal energy resource, but they are not the only one.  Subsidies should not put higher cost fossil fuels at a competitive advantage to other, often cleaner, substitutes.  

Conventional wisdom on propping up extractive industries as productivity declines is equally problematic.  Old wells are sometimes reopened as prices rise or technology improves, regardless of the state subsidies for doing so.  Further, the declining returns on old wells as costs rise and volumes drop really isn't that different structurally from what happens in many other businesses as technology and equipment ages, and new alternatives come to the fore.  Yet we don't see the tax code littered with subsidies to keep other declining productivity businesses going in the face of new competitors.  Government policy should be neutral with respect to aging industries rather than favoring polluting fossil fuels.


Summary

State subsidies to fossil fuels have been neglected for too long.  They are wide ranging, large, and often exacerbate environmental harm while also acting as a competitive impediment to emerging energy resources and improved energy efficiency to compete on an equal footing.  By inventorying these subsidies in five states, we hope to start a conversation on how to get rid of many of them, and to provide a foundation on which others can continue to expand the subsidy knowledge base.

 

Further reading

Readers interested in sub-national subsidies may also find the following three resources of value:

1)  OECD's inventory of fossil fuel subsidies.  OECD partially funded our work, and a some elements of this review will be included in their updated installment of fossil fuel subsidies within OECD countries.  Their most recent subsidy data can be accessed here.  The updated printed report is slated for publication in January 2013. 

2)  Good Jobs First Subsidy Tracker database.  This is the most extensive database I'm aware of covering a wide variety of state-level subsidies.  The coverage on grants and tax breaks is strong and growing.  But weaknesses in state reporting on other subsidy instruments reduce the ability of Good Jobs First to comprehensively track some of the other types of support.  Thus, coverage of credit and insurance subsidies, below-market sales of publicly-owned minerals, or state-provided goods or services in the energy sector is more spotty.  The values in the database can be viewed as a lower-bound estimate for total subsidies in a state.

3)  United States of Subsidies database from the New York Times.  Supplements information from the Good Jobs First database with additional sources, and provides a nice interface to facilitate tabulations of state-level subsidies to specific companies.  Not fossil-fuel specific.

Earth Track Blog Post

A simple Google search for "Jindal incentive," looking for descriptions of incentives the Louisiana Governor has put on the table for all sorts of groups, brings back 1.6 million hits.  There are so many subsidy announcements that it's hard to imagine even a McDonald's restroom can be built in the state without a subsidy, or that Jindal has time outside of his incentive announcements to actually run the state. 

Billions in gifts, but detailed data as well

But the volume of subsidies is only half the picture.  What I found so interesting about Louisiana that while it does seem to massively subsidize everything, its tracking of the support is quite good relative to what I've come across in other states.  The staff involved with these programs were forthright and responsive.  Queries were dealt with quickly and accurately, providing documents able to show in detail who was getting what from the state. 

This mixture is striking.  The state's biennial Tax Exemption Budget runs more than 400 pages, with details on each provision that lets this group or that out of paying into the state coffers.  Aggregate data for each tax base is presented (see page 6), showing both actual collections and how much the State estimates they've given away.  Corporate tax collections were $198m, for example -- compared with exemptions from corporate taxation of $1,459 million.  They calculate more than 88% of the tax base is exempt.  Thirty-six percent of the tax base for severance taxes (i.e., oil and gas) was exempted somehow.  And the total exemption is likely much higher:  one properly should not credit severance taxes (which are payments to the state for giving up valuable natural resources) if the proceeds are simply plowed back into support services for the same sector.

Without the level of transparency that Louisiana has on its subsidies, there would be no way to assess whether the policies make sense, or whether there are better ways to meet whatever job and development goals have been set forth as justifications for the giveaways.  But the magnitude of the subsidies, and their persistence over time, is a stark reminder that transparency alone is not sufficient for subsidy accountability and contestability. 

With so much documentation of the amount given away, Louisiana should do much more to assess the return it is getting on those "investments."  It's "hidden budget" is now as big as what the state is actually collecting in revenues.

 

Distribution of GO Zone Bonds is Skewed

There is another important lesson in Louisiana's data as well:  even "general" subsidies to job creation and investment tend to disproportionately favor the entrenched and powerful industries.  Louisiana's allocation for a special class of tax-exempt bonds, the Gulf Opportunity Zone Bonds (GO Zone), illustrates this. 

GO Zone Bonds were authorized by Congress in 2005 to help the states most hurt by Hurricane Katrina to rebuild.  Louisiana received the largest capacity of the Gulf states.  By the end of the program in December of 2011, it had used just about every bit of capacity (unused capacity by some accounts was less than 200 dollars) it had been granted.

Using data provided to us by the Louisiana State Bond Commission, we grouped recipients by industry.  Fossil fuel-related recipients included pipelines and fossil fuel storage, fossil-fueled power plants, extractive operations or firms supplying those operations, and chemical production reliant on fossil fuel feedstocks.  In some cases, a recipient project would related to other sectors as well as fossil fuels; these were included in a split category.  Some key findings from this exercise:

  • Fossil fuel-related recipients received 57% of the $7.8 billion in bond capacity issued.  Once joint projects are included, this jumps to 65%.  This fossil fuel sub-group also had a higher success rate than other sectors, with 53% of the applications being allocated capacity (versus 32% for all applicants) and 76% of the allocated capacity ultimately being issued (versus 48% for all sectors).
  • Two fossil fuel-related projects received the right to issue $1 billion in bonds each -- a Marathon Oil Corp. refinery and a Lake Charles Petroleum Coke Gasification Project.  Many other projects received tax exempt capacity in the hundreds of millions of dollars. 
  • The program was highly popular, with applications for all projects three-times the level of available funding.  About half of the capacity that received an initial allocation under the program did not end up being able to issue bonds, however.
  • Applications by plant-based biofuels firms were $1.5 billion, of which about $1.2 was allocated.  Yet, the sector ended up getting nothing (though a sugar facility and animal-fats biofuels project did receive GO Zone capacity).

The table below summarizes this key data.  A full listing of the applications, sorted by industry, can be found here.

Summary of GO Zone Applications and Issuance by Sector

  Applied for Allocated  Issued Issued/ applied for Issued/ allocated
           
Fossil fuel infrastructure      8,380,250,000       5,743,418,000    4,502,193,000 54% 78%
Joint use infrastructure including fossil fuels      1,330,000,000         959,443,560        620,000,000 47% 65%
    9,710,250,000    6,702,861,560  5,122,193,000 53% 76%
           
All applicants    24,594,025,100     16,392,582,459    7,839,749,820 32% 48%
           
Percent share, fossil fuel 34% 35% 57%    
Percent share, fossil fuel + joint use 39% 41% 65%    
           
Other sectors          
Aluminum           35,000,000           35,000,000                       -   0% 0%
Biofuels (plant-based)      1,550,000,000       1,160,000,000                       -   0% 0%
Biofuels (animal fat)         135,000,000         100,000,000        100,000,000 74% 100%
Sugar         405,575,000         230,000,000        100,000,000 25% 43%
Lumber and Paper         713,500,100         663,330,000          12,600,000 2% 2%
Nuclear Power         180,000,000           71,700,000                      -   0% 0%
Source:  Earth Track tabulations based on data provided by the Louisiana State Bond Commission, applications as of 3 January 2012.

Inventory of estimated budgetary support and tax expenditures for fossil fuels

For the first time ever, the OECD has compiled an inventory of over 250 measures that support fossil-fuel production or use in 24 industrialised countries, which together account for 95% of energy supply in OECD countries. Those measures had an overall value of about USD 45-75 billion a year between 2005 and 2010.  In absolute terms, nearly half of this amount benefitted petroleum products (i.e.

Earth Track Blog Post

There was very promising motion on subsidy reform contained in this March 2011 letter to Congress signed by a large number of conservative organizations (as well as others).  Since structural reform of subsidies will require a broad political coalition, the variety of groups signing on to this letter is a positive step.  Elements of their letter that I found particularly important are:

1)  Use of an appropriately broad definition of subsidies

"From direct payments and loan guarantees to mandates neither the environment nor the American economy can afford to be hampered by these anti-growth, anti-competitive policies." The inclusion of this mix of instruments is quite important, as it illustrates their understanding that subsidies go well beyond cash transfers, and that no matter the exact form, all can affect market positioning and competitiveness of beneficiary industries. 

Contrast this statement with the position taken by the Nuclear Energy Institute's Marvin Fertel in a recent presentation to Wall Street (page 13).  Fertel stated that "nuclear loan guarantees are actually a revenue generator for the government,"  knowingly glossing over two important facts.  First, revenues and long-term credit performance are quite distinct issues.  After all, mortgage closing fees made lots of money for loan originators until that little problem with borrowers not paying back their loans began to crop up.  Second, even without a default, the politically-selected access to Uncle Sam's line of credit greatly reduces borrowing costs for a lucky few, undermining the market position of competitors (see item 2, below).  The signatories to this letter have steered clear of these types of evasive definitions.

2)  Recognition that political selection of winners via subsidies favors established industries

Such policies provide unfair advantages for some producers, typically the more politically astute, while creating competitive disadvantages to other, often more promising and more nascent technologies. Centrally controlled energy policy has not worked, Washington does not know best, and the law of unintended consequences cannot be vitiated.

3)  Phased approach to level the energy playing field

The Coalition proposes four stages to their reform effort.  They begin with a cessation both of new subsidy creation and of the expansion of existing subsidies (in terms of scope or time frame).  They propose instead that any fiscal savings from eliminating subsidies be redeployed to the general economy through broad-based reductions in the tax rate.  Given that tax expenditures overall are in excess of $1 trillion per year, broad-based reform of tax expenditures alone could provide material reductions in general tax burdens.  The final stage of their plan is to dismantle the existing system of subsidies.

Additional work needed

There are some important limitations to this proposal that need to be addressed to make subsidy reform equitable and effective.  For example, most subsidies to renewable energy include sunset provisions already.  In contrast, many of the core subsidies to conventional fossil fuels are much older, and do not automatically expire.  Thus, unless dismantling of existing subsidies comes very close in time to allowing existing ones to expire, the proposed action plan will generate its own distortions.  A related issue involves externalities such as pollution.  To the extent fiscal subsidies are addressed, but emissions from coal or oil remain unchecked, the playing field will remain skewed.  Finally, the Coalition cites Pew's numbers for the scale of energy subsidies.  This is a good starting point, but even Pew does not believe they have systematically characterized the problem.  The subsidy reform "net" will need to grow wider over time if the the problem is to be fully solved.